Today at TILE we talked about the one year anniversary of the September 2008 financial panic, the September 15th anniversary of Lehman’s bankruptcy filing, and what a difference a year makes. Should we, as current and future consumers of financial products and advice, be comfortable with the changes that the crisis brought about? Do the changes in the system adequately protect us from the same experience happening again?
Some economic indicators (or measures of economic health) seem like they haven’t moved, even though if you looked at a chart, it could be an awesome roller coaster ride. For example, as of the end of August this year, Consumer Confidence was at 54.1 versus 58.5 last August, but with a low of 25.3 in February; the Unemployment Rate stood at 9.7% this August versus 6.2% last year and 4.8% at the end of 2008; Crude Oil is around $70 per barrel versus $115 a year ago; and the market, as measured by the S&P 500 was 1,021 at the end of August, 1,283 a year ago, and hit a low of 735 in February. This past year has had a ton of ups and downs (or volatility), but miraculously, we seem to be at a pretty good place now.
Somehow, while 106 banks failed in the last year, the remaining financial institutions seem to have a “business as usual” attitude. This is strange considering that 416 of them are on the FDIC Problem List (hint, there are more failures to come). The cost of these failures can be measured by the fact that the FDIC Deposit Insurance Fund stands at only $10.4 billion (versus over $45 billion a year ago) and the reserve ratio (what banks are legally required to hold onto as an offset to future losses), is at 0.22% – the lowest ratio since 1993. In contrast to the failures, some firms seem to be benefiting from the reduced number of competitors – actually making huge profits and increasing risk. According to the Wall Street Journal, trading revenues for the five largest Wall Street banks increased to $56.3 billion in the first six months of 2009 – more than double the $22.5 billion in 2008 and nearly the same as 2007. It should be noted, that compensation hasn’t changed too much either. With fewer banks, there is less competition. This means it may be harder to get a loan or a credit card; banks may offer less competitive rates for your deposits; and there could be less innovation in the future. With less money in the insurance fund, there is more risk that tax payers will need to foot another bill. If a bank made bad bets on real estate, how much should it cost you in the future?
The U.S. Government has made a monumental shift in its philosophical approach towards financial support. Nonetheless, it isn’t clear whether it has made the same monumental shift in how the industry will be regulated in the future. In the last year, the Government has spent $16 trillion across 30 government programs and Congress ok’d a $787 billion fiscal stimulus package. According to Deutsche Bank research, the Fed’s balance sheet expanded from $800 billion in 2007 to over $2.2 trillion today. Imagine if your balance sheet expanded almost threefold in less than 2 years. The key indicator for the future, however, is government regulation – and in that area, change seems slow.
What does this mean for the TILE Community? Have you ever gotten a driving ticket or been in trouble with your parents or school? Did you learn a lesson? Did you change your behavior? Or, did you just say, “I won’t get caught twice”? Well, in many ways, we are waiting to see whether the financial institutions that took big bets and made bad loans have “learned a lesson.” Yesterday, President Obama said, “Instead of learning the lessons of Lehman and the crisis from which we are still recovering, [banks] are choosing to ignore them. They do so not just at their own peril, but at our nation’s.” We hope that is not the case. However, it does feel like we bounced back pretty quickly (maybe too quickly) and while a few firms seem to have changed their practices, there are still a lot of people without jobs, without homes, and without a sense of optimism. Wall Street indicators are an important gauge of economic success or failure. But they’re not the only ones to look at.
- Amy